The UK economy is recovering at a ‘striking’ pace but there are ‘substantial risks’ to the outlook, according to the incoming deputy governor of the Bank of England.

Nemat Shafik, who will become the most powerful woman at the central bank when she joins next month, welcomed a ‘surprisingly strong’ period for the UK. But she raised the alarm over spiralling levels of household debt on the back of rising house prices and the crisis in the eurozone.

‘Serious threats to UK financial stability remain,’ she told MPs on the Treasury Select Committee in her first public appearance in the UK since being appointed. ‘There are clearly concerns about the housing market.’

Shafik, who was born in Egypt but grew up in the US and is an American and British national, will be only the second female deputy governor in the Bank’s 320-year history. The 51-year-old will take on responsibility for markets and banking and join the central bank’s financial stability watchdog, the financial policy committee, as well as the interest rate-setting monetary policy committee.

The MPC is widely expected to leave rates unchanged today having held them at 0.5 per cent since March 2009.

But Shafik, who has worked for the International Monetary Fund and the World Bank, hinted that the first rate rise since 2007 is approaching as the recovery picks up pace and unemployment falls. She said: ‘The recent pace of economic recovery in the UK has been striking – a welcome development after the extended crisis and post-crisis period.’

But she added: ‘If the recovery is to be sustained, it must ultimately be underpinned by a recovery in productivity and real incomes. The UK economy will need to see a sustained rebalancing away from domestic consumption and towards investment which has picked up recently and exports which have been more subdued.’

Pricey: with property prices soaring while wages rise by less than 2 per cent, the house price to earnings ratio has leapt and stands well above long-term average levels and near to the 2007 peak.

Shafik, who is well acquainted with the UK having been permanent secretary at the Department for International Development before joining the IMF, said interest rates were unlikely to return to the 5 per cent average seen before the financial crisis struck.

Turning to the housing market, she said ‘the biggest threat is the rise in household debt levels’ and that the number of people borrowing four or five times their incomes is ‘worryingly high’.

But the Bank had other tools at its disposal to cool the housing market apart from higher interest rates – such as the curbs on risky mortgage lending outlined last month.

Shafik described the Bank’s new rules to limit how many people will be allowed to borrow 4.5 times or more of their salary when taking out a loan as ‘an insurance policy’ that will help ‘pre-empt a worrying bubble emerging’.

The economist said: ‘As we saw during the crisis, households with high debt levels are very vulnerable and if a shock hits they cut consumption back dramatically and that can turn an ordinary recession into a great recession. So the vulnerability around household debt is a very serious one.’

Shafik will lead a review into how certain financial market benchmarks are set following allegations of market rigging – a scandal in which the Bank became embroiled amid claims some staff were in the know.

‘There are problems in fixed income, in currency and in commodities and we will look at all three,’ Shafik told MPs. ‘Collusion is unacceptable.’